Optimal Contracts When Agents Envy Each Other

Thakor, Anjan V.; Goel, Anand M.

doi:10.2139/ssrn.779384

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Optimal Contracts When Agents Envy Each Other

51 Pages Posted: 16 Aug 2005

See all articles by Anjan V. Thakor

Anjan V. Thakor

Washington University in St. Louis - John M. Olin Business School; Financial Theory Group; European Corporate Governance Institute (ECGI); Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Anand M. Goel

Stevens Institute of Technology

Date Written: August 4, 2005

Abstract

We examine the characteristics of endogenously-determined optimal incentive contracts for agents who envy each other and work for a risk-neutral (non-envious) principal. Envy makes each agent care not only about absolute consumption but also about relative consumption. Incentive contracts in this setting display properties strikingly different from those associated with optimal contracts in standard principal-agent theory. We derive results that help explain some of the discrepancies between the predictions of principal-agent theory and the stylized facts about real-world contracts.

Keywords: Principal-Agent, Optimal Contracts, Envy, Corporate Governance

JEL Classification: D63, D82, G30, G34, M52

Suggested Citation: Suggested Citation

Thakor, Anjan V. and Goel, Anand Mohan, Optimal Contracts When Agents Envy Each Other (August 4, 2005). Available at SSRN: https://ssrn.com/abstract=779384 or http://dx.doi.org/10.2139/ssrn.779384